Huge risk taking or strategic positioning unlikely, tactical moves possible ahead of US elections: Mitul Kotecha

Mitul Kotecha, Head of FX & EM Macro Strategy Asia, Barclays, says the Fed surprise is over. After a lot of debate, the 50 bps cut in a way was a little bit of an anti-climax. But it is not necessarily plain sailing for the global market. We still have worries about China. Chinese economic activity continues to remain under pressure and that continues to put a downward pressure on commodity prices. We still have a lot of geopolitical tensions in the Middle East and the ongoing war in Russia and Ukraine, and elsewhere. That is also a potential risk for markets.

Kotecha further says, US elections in early November are going to be also very important for markets and a huge amount of risk taking or strategic positioning is unlikely and more tactical moves likely ahead of the US elections.

Given that we are watching out for economic data on the service and manufacturing sectors, what has been your reaction to the move seen across asset classes post that 50 bps rate cut by the US Fed?
Mitul Kotecha: I think the initial reaction was risk-on. The market reacted well to the 50 basis point move from the Fed. The way the Fed messaged it was also positive. It was not seen as a panic rate cut, but something to kickstart the whole easing cycle off in a solid way. The Fed still sounded pretty constructive on the economy, with the jobs market as well softening, but not dramatically. So, in a way, it is a fairly positive cut from a market perspective and we saw that reaction. But actually, at the end of last week, some of that positivity did tail off.



US equities were lower. But going into the next couple of weeks or so, it just set the market up generally fairly positive for risk. We have been seeing that the dollar has been under a bit more pressure and that is helping in terms of EM assets and EM currencies. We have already seen a steepening of the US yield curve that should help cyclical currencies as well. Global volatility measures have declined. When we look at the VIX or the interest rate volatility such as move, that is also helpful for risk. So, it does seem generally that we are in a better risk-on environment going into the next or at least in the near term.

From the market standpoint, the Fed event is over. What could be the implications of that? Rates are down, flows will increase, liquidity will move up, and that could move back into commodity and emerging markets?
Mitul Kotecha. In a sense you are right, the Fed surprise is over. There was a lot of debate about a 25 or 50 bps cut and in the end we had 50 bps and in a way it was a little bit of an anti-climax. But I would not say it is necessarily plain sailing for the global market. When you look at it, we still have worries about China. Chinese economic activity continues to remain under pressure, that I think continues to put a downward pressure on commodity prices. We still have a lot of geopolitical tensions clearly in the Middle East and, of course, ongoing in Russia and Ukraine, and elsewhere, that is also a potential risk for markets. And then we are going to be data watching every single US data point with regard to the jobs market will be important. If we see another soft payrolls print, that could also have a negative impact on risk. So, look, I am very tentative. We have got a near-term rally in risk assets in the offing, but I do think there are clearly some major risk events and potential stumbling blocks that I have just mentioned that could derail this. So, I do not think it is plain sailing in that environment.

What are you expecting down the line when it comes to the kind of economic data that we will be monitoring, the service, the manufacturing sector, and what that could bring about for the global markets and any other data points?
Mitul Kotecha: The jobs data is going to be particularly crucial in the US and we are going to be watching every print there and any clues to upcoming payrolls reports are going to be important. The Fed has already said that they would see the unemployment rate getting up to about 4.4% and they have managed to put that into their forecast.

If we do see something above 4.4% on US unemployment, that will raise concerns, potentially meaning we could see a more aggressive Fed easing going forward. But on the other hand, the other thing to look at is, of course, global manufacturing has held up reasonably well, despite the fact that we have seen weakness in China coming through and PMIs are sound softer. Again, we will watch out to see whether there is resilience there. And on the service sector, again, that is going to be an important focus. But look, all of this as well, we have to bear in mind.

We have got a lot of political events, US elections coming up in early November that are going to be also very important for markets and we may not see a huge amount of risk taking or a huge amount of strategic positioning, maybe more tactical ahead of the US elections. So, all of these factors are going to play in terms of importance as we go into the next few weeks.